What Key Shipping Index Signals About Global Economy

The Baltic Dry Index, a favorite measure of traders looking to gauge shipping activity, has rebounded this week on hopes that central bank intervention in China and elsewhere will spur economic growth.

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Whether that optimism is realistic is another matter, as the index could be flashing little more than a false positive that money printing can lead to a genuine economic recovery.

The BDI measures the costs of shipping iron ore, coal, grains and other so-called dry-bulk commodities commonly associated with industrial growth. With stock marketsrallying but global economies sagging, the index has tumbled more than 56 percent in 2012, falling at one point in 31 straight trading sessions.

But the BDI has rallied about 14 percent this week and more than 4 percent Friday alone — a move that coincided with last week's Federal Reserve quantitative easingmove and general aggressiveness from central banks around the world.

"It's perhaps responding to the Chinese threats to create more stimulus in the economy and build another empty city in the country," said Michael Pento, an economist and founder of Pento Portfolio Strategies.

A critic of central bank liquidity programs, Pento pointed out that the surge in the BDI has not coincided with a corresponding increase in equity prices, in particular the Chinese stock market, which has languished around unchanged through the year.

"Chinese exports to Europe and Chinese exports to Germany are plunging," he said. "Until I get a confirmation signal from the Shanghai (stock index) for the Baltic, I'm not a believer in this rally and I'm not going long basic metals."

Indeed, the Baltic has become somewhat of a proxy for Chinese activity being that the nation has emerged as the world's second-largest economy and its largest exporter of goods with about $2 trillion worth annually.

The European debt crisisand accompanying recession has crushed export growth and been a major contributor to the BDI slide.

With central banks pledging action and the Fed promising open-ended easing until the economy stabilized, that may have kindled some expectations that shipping will benefit.

"Hopes for an economic pickup on a global perspective are being boosted not necessarily by QE3 but by the coordinated efforts of central banks to keep liquidity floating," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "Look at what's happening with basic metals since the announcement of QE3 and the coordinated efforts of central banks."

In fact, the base metals complex had been rising sharply in anticipation of QE3 but has been essentially flat since the announcement on Sept. 13. An exchange-traded fund that tracks the group, the PowerShares DB Base Metals Trust , has gained about 11 percent over the past three weeks but is down more than 4 percent year to date.

Another factor, though, that could make the Baltic Dry's rise a passing trend is tension in the Middle East.

Some traders said the threat that Israel may take action against Iran and its nuclear ambitions, which could cause problems in the Strait of Hormuz, may have shippers rushing to get their products to market before the Jewish holidays end.

"If I'm worry worried about what's going on in the Middle East, if suppose something flares up, I'm going to want to get out," one strategist said.